Page last updated at 14:15 GMT, Tuesday, 16 September 2008 15:15 UK

Consumer inflation rises to 4.7%

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Rory Cellan-Jones looks at the letter sent by the Bank of England governor Mervyn King to Chancellor Alistair Darling

The annual rate of UK inflation rose to 4.7% in August from 4.4% the month before, a higher-than-expected jump.

In a letter to the chancellor, Bank of England governor Mervyn King warned that inflation could reach a rate of 5% before falling back.

Mr King blamed food and energy price rises for inflation rising beyond the government's 2% target.

Inflation as measured by the Retail Prices Index (RPI) - often used in pay negotiations - fell to 4.8% from 5%.

Food and fuel costs rise

The largest contributor to August's rise in inflation was higher gas and electricity bills, with a number of energy firms raising their prices last month, the Office for National Statistics (ONS) said.


Interest rate cuts seem likely to come at some stage. Today's message from the Bank is don't expect anything in a hurry

Hugh Pym, BBC economics editor

This outweighed the fall in the price of heating oil and petrol, which fell by 5.5 pence per litre between July and August to stand at 113.3p. This followed sharp falls in the price of oil since July when it reached almost $150 a barrel.

The rising price of food and non-alcoholic drinks was also a factor behind the pick-up in inflation, mainly as a result of the increasing cost of meat, fruit and pizzas.

The fall in the RPI inflation measure was attributed to bank mortgage interest payments remaining static, compared with last year when banks passed on a Bank of England rate rise to home owners.

Global phenomenon

If inflation hits a rate more than one percentage point above or below the government's 2% target, the Bank of England governor must write a letter to the government to explain what action it is taking to control consumer prices.

DEAR CHANCELLOR...
Governor's letter to the chancellor
The expected peak in inflation later this year is now likely to be significantly higher than anticipated
Bank of England governor Mervyn King
Most computers will open this document automatically, but you may need Adobe Reader

The governor must write to the chancellor again every three months if inflation stays out of the target band.

Mr King last wrote to the chancellor in June. In his latest letter, Mr King blamed "sharp, largely unanticipated" increases in food and energy prices for pushing inflation well above the government's target.

He said that these pressures were pushing up consumer prices around the world, with eurozone inflation at 4% and US CPI inflation at 5.6%.

Adding to this was a steep pick up in import prices, with the value of the pound falling by 15% against other currencies since sterling's peak in July last year.

Slowdown needed

Mr King hinted that he may have to write more letters to Alistair Darling as he predicted that CPI inflation was likely to remain stubbornly above the government's target until "well into 2009".

In order to prevent inflation expectations from becoming entrenched, he said that the Bank of England has "become firmer in its belief that a period of muted economic growth is necessary to dampen pressures on prices and wages".

The chancellor agreed with Mr King's assessment of inflationary risks and outlook, which some analysts said suggested that an interest rate cut may still be some way off.

"Given the Bank's caution, it does suggest that they are not particularly keen to loosen monetary policy just yet and that it would take some severe financial market problems or a major downward revision to the activity outlook to get them to move rates in October or even November," said James Knightley of ING.

However, the British Chambers of Commerce (BCC) called for swift action.

"As the global financial crisis worsens, there is an urgent need to act promptly, in order to counter severe threats of recession," said David Kern, economic adviser to the BCC.

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